**BarroMetrics Views: S&P Revisted 2014-12-01 II**

I was going to complete the series on Trends today; but, last night’s price action in the E-minis is worth a mention.

As Figure 1 shows, in the day session, each time the ES tried to rally, it was sold off. I can’t remember the last night this happened. In addition, in today’s FT MohamedEl-Erian suggests that stock traders are ignoring the signals from the commodities and bond markets – that a stock market decline is being warned. Finally a piece from The HK Standard which reported that home prices again fell in November by an average of 0.27% according to E-House China Holdings and China Real Estate Index System.

The CREIS further stated that most cities had large inventories of unsold homes. The cut in interest rates is unlikely to spur a recovery.

If we take these various items, and add them to the technical picture I described in __ BarroMetrics Views: S&P Revisted 2014-12-01__, there may a solid warning that the stock indices are about to provide an unwelcome Xmas present. Let’s see what the future brings

FIGURE 1

Hi Ray

Do you feel there maybe an inverse relationship between s&p index and gold in short term now?

It seems that gold had a strong signal to go up when US stock index showing weakness?

Hi Wenda

There is a marginal 2 year inverse correlation between the 2: a rank of -75.6 with a z-score difference of 1.03.

The z-score diff tells us how likely the correlation is to continue.

A ranking of 1.03 means it barely reliable. See info below on Z-scores.

5 to 35 years out show a positive correlation but below my required threshold levels so we can say that 5-35 years out, the correlation between gold and the S&P is unreliable.

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If a Z-Score….

a Has a value of 0, it is equal to the group mean.

b Is positive, it is above the group mean.

c Is negative, it is below the group mean.

d Is equal to +1, it is 1 Standard Deviation above the mean.

e Is equal to +2, it is 2 Standard Deviations above the mean.

f Is equal to -1, it is 1 Standard Deviation below the mean.

g Is equal to -2, it is 2 Standard Deviations below the mean.

Hi Ray

Any convenient tool you are using to calculate correlation and z-score

“… The image on the right shows scatterplots of Anscombe’s quartet, a set of four different pairs of variables created by Francis Anscombe.[17] The four y variables have the same mean (7.5), variance (4.12), correlation (0.816) and regression line (y = 3 + 0.5x). However, as can be seen on the plots, the distribution of the variables is very different… ”

http://en.wikipedia.org/wiki/Correlation_and_dependence

Is S & P index and gold linearly co-related?

If not, correlation figures are USELESS!

Hi Paul

No idea. But from a hands-on trading experience. I find correlation numbers incredibly useful for money management,

hi Ray,

If there is a good correlation, do you look for the statistics which are leading/lagging?

When there is an upturn/downturn, which one turns first, most of the times?

Hi Paul

By its nature, correlations are lagging.

Do you know of any stats calculations that are leading? I don’t.